Fiduciary Duties

George Michael Gerstein talks to InvestmentNews about state fiduciary developments

Here is part of an interview I gave to InvestmentNews on what’s happening at the state legislative/enforcement level regarding the regulation of investment advice to retail investors.

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

Callan data further highlights low utilization of ESG within DC plans

DC plan fiduciaries evidently remain skeptical of ESG investment options within DC plans (public and private). There are myriad explanations for this gap between DC plans and other institutional investors, including, but not limited to, fiduciary duty concerns. In fact, Callan’s excellent ESG/DC plan surveys show fiduciary duty concerns are receding in the minds of fiduciaries. Nevertheless, adoption rates remain relatively low. Here is an update from Callan.

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

Timeline of Fiduciary Rulemaking

Timeline of Fiduciary Rulemaking (click image to enlarge)

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

The Fiduciary Rule: Gone, But Not Forgotten

With yesterday’s action by the Fifth Circuit Court of Appeals effectively unwinding the Department of Labor (DOL) Fiduciary Rule, financial institutions now only become investment advice fiduciaries to retirement plans subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA) and individual retirement accounts if they satisfy the original five-part test, a higher threshold (for becoming a fiduciary) to be sure. While the road to the Fifth Circuit officially vacating the Fiduciary Rule unnerved some, we urged calm, and believe that a measured approach continues to work best.

As a reminder, under the five-part test, one becomes an investment advice fiduciary under ERISA if he or she (1) provides advice as to the value of securities or other property, or makes recommendations as to the advisability of investing in, purchasing or selling securities or other property, (2) on a regular basis, (3) pursuant to a mutual agreement, arrangement, or understanding with the plan or a plan fiduciary, that (4) the advice serves as a primary basis for investment decisions with respect to plan assets, and where (5) the advice is individualized based on the particular needs of the plan or IRA.

With the Fiduciary Rule now just a memory, various firms’ fiduciary status is likely to change, particularly around rollover recommendations. Because of this, we continue to recommend:

  1. Inventorying the type and nature of typical communications with retirement investors (e.g., other fiduciaries, plan participants, IRAs, etc.) and tagging those that might no longer be fiduciaries under the five-part test.
  2. Identifying any representations, disclosures or statements regarding fiduciary status that were made in light of the Fiduciary Rule’s scope, which may at some point need correction.
  3. Re-examining what changes were made to internal policies and procedures to account for the Fiduciary Rule, particularly as state regulators have used non-compliance as a basis for blue sky law violations.
  4. Reconsidering any revisions to contracts in order to satisfy the DOL’s guidance on 408(b)(2) disclosures that it issued last August.
  5. Re-evaluating whether to continue excluding small plans and IRAs from investing in private funds, if that determination had been made to prevent a fund manager from inadvertently becoming an investment advice fiduciary to an IRA investor or small plan during the sales and subscription process.

But the DOL is not the only show in town. Fiduciary rulemaking over retail advice continues to evolve, as we highlight in the timeline below.

Timeline Fiduciary Governance Retail Investment Advice
(Click image to enlarge)

Firms continue to comb through the Securities and Exchange Commission’s (SEC) standard of conduct release. Investment advisers, for instance, may be seeking clarity from the SEC on its proposed Interpretive Release on the extent to which the adviser may satisfy its fiduciary duties through disclosure. Both broker-dealers and investment advisers are also considering the extent to which proposed Form CRS would help alleviate investor confusion.

The SEC also proposed (A) to require broker-dealers and investment-advisers to prominently disclose their registration status; and (B) to restrict standalone broker-dealers and their financial professionals from using the terms “adviser” and “advisor” as part of their name or title. These proposed changes are part of greater scrutiny by federal and state regulators over the titles financial professionals use that could confuse investors as to the nature of the relationship, which has been the focus of a number of state legislatures. Interestingly, the states are taking different approaches to title reform.

Various bills, including New York’s Investment Transparency Act, which either attempt to impose fiduciary status and other heightened obligations on federally-regulated broker-dealers and investment advisers or seek enhanced disclosure of whether a firm is acting in a fiduciary capacity, are advancing. Some of these bills interplay with the SEC standard of conduct release with the prospect that the risk associated with these bills will not be known until the SEC finalizes its standard of conduct release, assuming SEC Chair Jay Clayton can garner enough votes from his fellow commissioners.

The Fiduciary Rule may be gone, but it hasn’t been forgotten. Investor confusion over fiduciary status and conflicts of interest have the attention of the SEC and the states.

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

Smooth Implementation of China A-Shares in MSCI EM Index

We’ve been following developments re. China A Shares, as investment managers continue to ask about the fiduciary implications of entering this market.

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

George Michael Gerstein Sits Down With 401(k) Specialist Magazine to Discuss Fiduciary Implications of ESG Investing

Extract from 401(k) Specialist Magazine: “Does anyone have a concise definition of ESG? Anyone? Neither do we. It’s one of the main sticking points for many 401k advisors and their plan sponsor clients when constructing investment menus with environmental, social and governance (ESG) factors in mind. The DOL and similar regulatory bodies have made attempts at guidance to help clear it all up (most notable in 2008, 2015 and just last month), but true to form with government “help,” it’s too often anything but. Which is why we called George Michael Gerstein, Fiduciary Governance Group Co-Chair with legal powerhouse Stradley Ronon Stevens & Young. Gerstein has followed the issue closely and cleared much of the confusion during a presentation and panel at Fi360’s annual conference in San Diego in April. He took some time to answer the most common questions he’s getting on the topic, and the red flags 401k advisors, sponsors and participants should watch for when entering the space.” A link to the Q&A can be found here.

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

FX Global Code turns 1 – what does it mean for fiduciaries?

As  I articulated in Profit & Loss, “Though [the FX Global Code] does not have the force of law, it can serve as a useful springboard for fiduciaries to buttress risk controls and fiduciary awareness over an industry that seems obscure to some. The Code can catalyse a change from disengagement and insufficient understanding of common (and, in certain instances, controversial) FX practices to engagement and a deeper understanding of a market whose products are in so many investment policy statements and mandates of retirement plans.” I wrote that the Code’s voluntary nature opened the door to plan investment committees and investment managers the opportunity to gauge the level of the FX service provider’s engagement with the Code and how such engagement (or lack thereof) could implicate their fiduciary duties. I opined: “However, the genius of the Code is that not all principles apply to each market participant, and, as a result, requires at least an active review of the Code to determine which principles apply to a particular market participant, including a fiduciary. An investment committee that outsources currency hedging to a third party may have an interest in how that third party will plan to adhere to the Code. Through awareness comes engagement with service providers. Because the Code’s principles set forth good practice in the market, a plan fiduciary should become aware of the Code and internalise it.” My full op-ed can be found here.

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

Ignites: GAO Nudges DOL to Clear Up ESG Guidance

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

George Michael Gerstein Interviewed by Fund Intelligence on GAO’s ESG Report

Noah Zuss of Fund Intelligence interviewed me, along with Jon Hale (Head of ESG Research at Morningstar) and David Blanchett (Head of Retirement Research at Morningstar Investment Management), regarding the practical effects of the GAO report and its relation to the DOL’s own recent ESG guidance in this developing area. The article can be found here.

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

Key Takeaways from the GAO Report on ESG Investing by ERISA Fiduciaries

The Government Accountability Office (GAO) yesterday released a new report on ERISA fiduciaries’ incorporation of environmental, social and governance (ESG) factors into its investment process. At 63 pages, here are the key takeaways:

  1. The report is focused only on instances where fiduciaries consider ESG factors as material risk factors that are part of an ordinary prudence analysis. In other words, the GAO did not focus on other strategies (e.g., impact investing), such as those that select an ESG factor for moral reasons, etc., which is the historical association of ESG investing. In this sense, the GAO deserves a lot of credit for focusing on this sophisticated approach to ESG.  You may recall that my paper on climate change risk focused on this very issue.
  2. Rather unfortunately, the report was largely completed prior to the DOL’s issuance of Field Assistance Bulletin (FAB) 2018-01, which we discussed here. The principal recommendation by the GAO is for the DOL to issue guidance on whether a fiduciary can incorporate ESG factors into the management of a default investment option in a defined contribution plan. As you may know, FAB 2018-01 seemed to do just that, though not in an entirely clear manner. Nevertheless, the GAO addressed FAB 2018-01 at the end of the report and narrowed its initial recommendation, namely, that the DOL better explain how fiduciaries can utilize the integration strategy in a QDIA. In the DOL’s defense, FAB 2018-01 seems to address (to some extent) whether a QDIA can utilize the integration strategy; the DOL instead hit the breaks on offering a themed ESG product as a QDIA.
  3. According to the GAO, the DOL is amenable to issuing additional guidance on ESG investing, provided there is enough interest by fiduciaries. The DOL is mum on its Form 5500 project, and whether any ESG disclosures on a revised 5500 are in the works.
  4. Those close to ESG will unlikely find anything surprising in the GAO report on the various reasons why ESG is not yet widely adopted by US retirement plans: questions over the reliability/comparability of disclosures, ratings and rankings–designed to help fiduciaries incorporate ESG factors–all continue to be cited as impediments. Regulatory uncertainty, and definitional ambiguities, also remain hindrances. I recently spoke on a number of these constraints to greater adoption by fiduciaries.

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.